In 2001 Clifford Asness, a cerebral but fiery-tempered hedge fund manager with a penchant for comic book memorabilia, penned a paper arguing that his industry’s skills were “overstated”. Understandably, it went down like a lead balloon.

Mr Asness was inundated with irate calls from some of the industry’s biggest names, and even got the occasional glower at school events attended by other hedge fund fathers. “I got yelled at by a lot of famous people,” he recalls.

He survived the opprobrium. Mr Asness’s company AQR is today a major player in the hedge fund industry. Its $226bn of assets under management outstrip even Ray Dalio’s Bridgewater Associates. But rather than a hedge fund, AQR could now arguably be better described as a hedge fund killer.AQR is at the vanguard of a revolution quietly sweeping through the asset management industry: “ Factor investing”, which in theory breaks down market returns into their basic components, researching what drives them and trying to systematically exploit their characteristics.

Factor investing is part of the broader world of computer-powered “quantitative” finance. But rather than scour markets and oceans of data for fleeting signals, factors are the big, persistent market drivers that in theory exploit timeless human foibles, such as our tendency to favour glamorous stocks over solid ones. Financial academics argue that a lot of what asset managers do is take advantage of these well-known patterns, anomalies and inefficiencies. But if one can do so systematically and cheaply, why pay for an expensive fund manager?

“Before, market drivers were like gods in the sky — mysterious and often unfathomable. But with factors we can now understand what actually drives performance,” says Marko Kolanovic, head of quantitative research at JPMorgan.

Think of factors as the basic ingredients of a solid meal. By deconstructing and finding the healthiest components, fans say they can be reassembled into a better-balanced, tastier diet. In other words, a more diversified, robust and cheaper investment portfolio than one built with traditional, blunt asset classes like stocks and bonds.

Recent results have been mixed, with many factor-focused funds — including AQR’s — suffering a mediocre or dismal 2018. But many pension funds, endowments and even retail investors are still embracing this new approach. BlackRock estimates that there are $1.9tn of assets in dedicated factor strategies, and predicts this will swell to $3.4tn by 2022.

Some have even gone so far as to call AQR the “Vanguard of hedge funds”, a reference to the passive investing group founded by Jack Bogle that has helped popularise cheap, index-tracking funds for the masses and unsettled the mutual fund industry in the process.

That may be a step too far to describe an investment group that still boasts plenty of expensive hedge fund strategies, some of which have also struggled in 2018. But it is “what we want to be. It’s aspirational,” Mr Asness admits. It is a description tacitly endorsed by Mr Bogle himself, who has said that among hedge funds AQR “is the one I hate the least”.Defining factors

BOLOGNA – It has been less than two months since the populist Five Star Movement (M5S) and the right-wing League party formed a new Italian government, so it is too early to tell how the coalition will translate its campaign rhetoric into concrete policies. In fact, the coalition’s internal contradictions might limit the scope of its legislative action, or even bring about its downfall – possibly even before the European Parliament elections in May 2019.That said, it is not too early to see what the Italian government’s anti-European posture will mean for Europe. For European Union leaders watching from Brussels, the political dynamic that the M5S/League coalition has set in motion could prove far more consequential than any specific policy initiatives.The M5S/League coalition is the first instance of an overtly anti-EU government coming to power in one of the bloc’s founding member states. Although its radicalism is partly a response to the Italian economy’s dismal performance over the past two decades, a similar brand of anti-establishment politics has taken root in European countries that have fared better. Far from being an outlier, Italy could be a harbinger of what awaits many other countries, especially after the EU elections.Italy’s new government has wasted no time taking a hard line on immigration. Matteo Salvini, the League leader and current interior minister, has castigated the EU for leaving Italy on its own to deal with incoming asylum seekers. Salvini’s rhetoric is often racist and inflammatory, but he has a point when he argues that the refugee crisis demands a collective solution. The EU’s highly visible failure on this issue has played directly into its critics’ hands.So far, Italy’s challenge to the EU over immigration has forced “core” member states such as Germany to begin considering negotiated solutions to the problem. But a truly viable cooperative approach still seems a long way off.That means governments that sympathize with Salvini’s position will most likely continue to pursue unilateral policies, possibly jeopardizing the Schengen system of passport-free travel within most of the EU. Destroying this foundational EU institution might not be Salvini’s stated goal, but he is clearly taking things in that direction.Meanwhile, on the economic-policy front, the new Italian government has introduced its “decreto dignita” (“law for dignity”), which will reverse some of the labor-market reforms enacted by former Prime Minister Matteo Renzi’s center-left government. Specifically, the legislation will make it more difficult for firms to fire permanent-contract workers, or to employ workers on temporary contracts over the long term.A technical analysis conducted by the state National Insurance Agency predicts that the new law will lead to an overall decrease in employment, and that this will negatively affect the national budget. In response to these findings, the government has threatened to fire the NIA’s president.The M5S/League government’s attack on the independence of the civil service offers a taste of what is to come. A broader conflict within the coalition is already playing out over how to reconcile left- and right-wing economic-policy agendas within the constraints of EU fiscal rules – which the current finance minister, Giovanni Tria, says he wants to uphold. This conflict could come to a head if the coalition moves forward with its proposals for a guaranteed-income scheme, pension reforms, and tax cuts.Although the government’s immediate objectives center on domestic matters, its policies could have profound implications for the EU generally. As we have already seen in the case of refugee policy, the government will most likely adopt a confrontational position toward the EU whenever it can. After all, challenging the EU plays well with both the M5S and League electoral bases, and other governments – not least those of Hungary and Poland – have already demonstrated the effectiveness of scapegoating Brussels for domestic failures.But what is the end game? On the one hand, the Italian government’s aggressive attitude could be interpreted as a negotiating tactic vis-à-vis the EU; on the other, it could be a political strategy for the upcoming EU elections. Like resurgent nationalist parties in other member states, the M5S/League may be trying to push the EU toward a looser federation in which key policy prerogatives are transferred back to national governments.But for eurozone countries, this outcome would lead to more instability. In the absence of aligned budgetary policies and common rules, a common currency is simply not sustainable. Though M5S and League leaders are not calling for a withdrawal from the eurozone, much less the EU, their ostensibly domestic agenda is bound to damage the bloc’s foundations.The EU must brace itself. We are about to see the damage that can be done when a major member state pursues a program of EU antagonism. Italy is showing that without progress toward “ever closer union,” a quiet disintegration could be in the offing.

Lucrezia Reichlin, a former director of research at the European Central Bank, is Professor of Economics at the London Business School.

There's no place for individual strongmen in Hanoi's version of communist power.

By Bennett Murray

This picture taken on January 24, 2016 shows a worker repainting a large statue of the late president Ho Chi Minh, founder of today's communist Vietnam, at a public park in the southern city of Can (STR/AFP/Getty Images)

When U.S. Secretary of State Mike Pompeo flew to Hanoi on July 8 after a tense working meeting in Pyongyang, Vietnam was on his mind. Speaking in a city pummeled by U.S. bombs five decades ago and where U.S. servicemen were held captive for years in squalid conditions, Pompeo invited Kim Jong Un to look at the fellow communist state for inspiration.Pompeo was not just trying to flatter his hosts. The nation’s journey from impoverished pariah to hot frontier market has not escaped Kim. South Korean media reported that he brought up the country’s successes several times during his April meeting with South Korean President Moon Jae-in, saying he saw it as a way forward. The appeal for Kim is obvious: Perhaps it is possible to have peace, prosperity—and the uninterrupted rule of a single party?

That might be true. But Kim should be forewarned that the Vietnam model might spell the death of his own rule, even if it preserves the rest of the Pyongyang regime.The Vietnam model broadly refers to a series of reforms—known as doi moi, meaning “renewal”—that were first rolled out in 1986. Vietnam, at the time, was locked in cold wars with both the United States and China, with the Soviet bloc providing its only lifeline. In a process that continues to this day, the state slowly but steadily began devolving economic power to form a “socialist-oriented market economy.”The government continues to hold on to key sectors, such as energy and finance, but state-owned firms coexist alongside ExxonMobil and Ford in the nation’s 21st-century economy. The system is somewhat similar to that of its giant neighbor, China, but with less red tape, as Vietnam has liberalized its markets to secure free trade agreements. On the World Bank’s ranking of countries by the ease of doing business there, Vietnam comes in 68th place, while China comes in 78th. The shift in policies has created a booming modern economy.

But there’s a catch for any prospective dictator. The party’s willingness to shed leaders with abandon is an integral part of the Vietnamese model. Since 1986, Vietnam has cycled through five general secretaries—the country’s de facto head of government—and seven prime ministers. Some have been ditched rather unceremoniously amid brutal infighting in the central committee, where factions fight vigorously behind closed doors before emerging with the appearance of consensus.

The lack of a strongman on top is a feature, not a bug.While Kim is the third generation to inherit power, and China’s Xi Jinping, the son of a prominent revolutionary leader himself, is returning to the party’s strongman roots crafted by Mao Zedong, communist Vietnam has always opted for collective leadership. Even Ho Chi Minh found himself sidelined throughout his presidency, never enjoying the power of Mao, Stalin, or any of the Kims. Some of the most fateful decisions of the war, even the Tet Offensive, were made without his consent.And while the image of Ho Chi Minh is omnipresent in contemporary Vietnam, with his image adorning billboards, posters, and even online memes created by pro-regime influencers, the images of living politicians are never seen in public, nor are their collections of writings found in bookstores. The cult of personality is a privilege of the dead in Vietnam; there is no Xi figure, let alone a Kim.

The result is a country where ordinary citizens have no stake in the fate of any particular politician. When one brings up politics today in Vietnam, it is common even for educated locals to not be entirely sure who their leader is. While they generally know the names of General Secretary Nguyen Phu Trong, Prime Minister Nguyen Xuan Phuc, and President Tran Dai Quang, they rarely know what exactly they do, nor who is senior.Their confusion is understandable, as even professional observers of Vietnamese politics often stumble when trying to explain the national power structure. Figures come and go from power at a rate comparable to Western democracies but with none of the transparency. Journalists and researchers rely heavily on unverified rumors to get a sense of what is going on in the politburo. But given the rate at which leaders cycle, it’s certain that Communist politics in Vietnam remain a lively, unstable affair, even as the party itself thrives.In contrast, the Workers’ Party of Korea is a showboat for the Kim dynasty. Its holds no regular party congresses, having allowed 36 years to lapse before it held its most recent one in 2016. Nor is there any indication that its central committee would be allowed to pose any serious challenge to Kim’s leadership. That it could peacefully force Kim to take an early retirement, as is common in Vietnam, is unthinkable.

Could Kim replicate the success of doi moi without copying Hanoi’s political philosophy? Possibly, but decentralization, by necessity, entails devolution of state powers to private actors. While its history of collective leadership provided the Vietnamese party with the flexibility necessary to accommodate the interests of a private sector, the Kim family has proved stubbornly resistant to economic innovation over the past 70 years unless forced, as they were by the collapse of the Soviet Union.Kim has attempted some changes, but if he went for wholesale economic reform, he would have to create a new, risky script for regime survival. Chinese and Vietnamese innovators in the 1980s were able to send numerous missions to the United States, Soviet Russia, and elsewhere to learn from their models. North Korea hasn’t put the groundwork in yet. And Kim is no economist. Change would force him to allow technocrats around him to write the new rulebook for a game he does not completely understand.Kim may be tempted to think he can become an all-powerful figure in the vein of Xi, only with Vietnam’s greater economic liberalization and better ties with Washington. But Xi has only been in power for five years and was only able to seize control after China had experienced decades of economic growth and reforms in the post-Mao era under collective leadership. He also had the benefit of adapting to the economic status quo rather than inventing a new one. As Kim has yet to establish himself as either an economic or political innovator, his personal success would be far from certain.In his mid-30s, Kim potentially has decades left to either rule or, at best, become politically sidelined. While a more prosperous North Korea would no doubt benefit Kim personally if he were around to enjoy it—he may, for instance, be able to fly his own plane to the next bilateral summit—the potential personal risks presented by a Pyongyang outside the Kim family’s control are great, as Jiang Qing learned after her husband Mao Zedong died. Within a month, Jiang and her cronies had been toppled in an internal coup. With countless purges and executions of influential party officials under Kim’s family’s rule, he knows that the knives will be out for him if things change—but he may not know who would stab first.Kim’s career, and possibly his life, may already be backed into a corner where the best shot of survival is to stick to the model that has served his family’s peculiar regime for the past seven decades, granting concessions only when absolutely necessary. Following the path of Vietnam would certainly be a bold step forward for Kim—it would very likely give the Workers’ Party of Korea a fresh lease on life—but it is not one that would necessary ensure his own safety.

Fight for $15!This was the rallying cry of what eventually became the largest fast-food strike in US history.It all started in late 2012, when over 100 New York City fast-food workers walked off their jobs, demanding higher wages.Many made minimum wage. They were struggling to make ends meet as rent, utilities, medical care, and the overall cost of living continued to rise much faster than their wages.The “Fight for $15” movement quickly spread across the country.I think it’s a troubling sign of what lies ahead for US politics. And it has serious investment implications.

Minimum Wage, Maximum Stupidity

The economic stupidity of minimum wage laws should be easy to grasp. But, as American journalist H.L. Mencken once noted, “Nobody ever went broke underestimating the intelligence of the American public.”In short, minimum wage laws are really a prohibition on voluntary employment. Employees sell labor. Employers buy it.And in a free market, the price of labor would be the wage on which they voluntarily agree. The price of labor is governed by the laws of supply and demand, just like any scarce factor of production.But the US labor market is not a free market. Minimum wage laws are the chief reason why.These laws are really a form of price control—in this case, on the price of labor. And price controls always create destructive distortions in the market. Here, that means unnecessary unemployment and artificially high prices passed on to consumers.Even the Congressional Budget Office admits that 500,000 jobs would be lost if the US government raised the federal minimum wage from $7.25 to $10.10.How many hundreds of thousands of jobs (or more) will be lost when the Fight for $15 movement eventually succeeds is anyone’s guess.

Protestors demand a $15 minimum wage

The Fallout Hurts Low-Skilled Workers

Minimum wage laws are no different than government-mandated prices on other input costs.Take aluminum cans, for example. Suppose the government sets the price of an aluminum can at $5… far above its market price.Coca-Cola would have to pass along that artificially high cost to its consumers to stay in business. But how many people would spend over $5 for a can of Coke?Few people would buy something so artificially expensive. That’s particularly true when there’s a ready alternative—like glass or plastic bottles—which Coca-Cola could sell at market prices.The end result would be a glut of $5 Coke cans sitting on store shelves. Nobody would buy them.In this scenario, the problem isn’t that people don’t want Coke. They do.The problem is the artificially high price of aluminum cans… which leads to the artificially high price of Coke… that just sits on shelves, gathering dust, until eventually, Coca-Cola drastically cuts back production because of lack of demand.A similar dynamic plays out when the government mandates the price of labor. But instead of Coke cans, potential employees sit on the shelves while employers eliminate jobs they otherwise wouldn’t, and are forced to pass on higher prices to consumers that they otherwise wouldn’t.The plain truth is, not every job generates $15 an hour worth of output. And some workers would much rather accept jobs that pay less than $15 than have no job at all.But federal, state, and local governments prohibit this voluntary arrangement to varying degrees with minimum wage laws. (The federal minimum wage is $7.25 per hour. At $12.50 an hour, Washington, DC currently has the country’s highest minimum wage.)So employers don’t hire them. They’re no more likely to overpay for labor than you are to pay $5 for a Coke. And workers remain needlessly unemployed.This is how minimum wage laws hurt the low-skilled people they’re supposedly designed to help.

It also leaves companies with no choice but to raise prices, hire fewer people for fewer hours of work, or find alternatives. Increasingly, that means turning to machine automation.Take McDonald’s, for example. The company is implementing mobile ordering and digital kiosks to automate the ordering process. It’s on pace to replace human cashiers in 5,500 restaurants in the coming years, according to a recent study.McDonald’s self-service kiosks

Meanwhile, Shake Shack recently announced its first “cashless shack” in New York. It will be the company’s first restaurant to exclusively use self-ordering kiosks.The shift towards automation in the fast food industry is a direct response to the Fight for $15 movement. As the government forces companies to pay an increasingly higher price for labor, more will look to machines to stay competitive.Perverse as it may be, this is the inevitable result of the higher minimum wage laws that Fight for $15 is pushing for. Yet, the movement is growing…The Service Employees International Union (SEIU), which represents nearly two million workers in the United States and Canada, now supports it. Rising socialist Bernie Sanders and an increasing number of other politicians are also on board.

“Fight for $15” Is Just the Tip of the Iceberg

I think Fight for $15 is only one symptom of a much larger epidemic. It points to an increasingly radical political environment that will have serious financial consequences.Polls suggest that a majority of millennials (people born between 1982 and 2004) now favor socialism. And a growing number favor outright communism—if it’s implemented “correctly.”By next year, millennials are expected to surpass baby boomers as the nation’s largest living adult generation. This is one of the reasons Bernie Sanders and other socialists are growing in popularity.The Chair of the Democratic Party recently declared a young, millennial socialist who won a New York City primary “the future of our party.”

There’s No Such Thing as Free Money

Bernie and his fellow socialists are not offering anything new. It’s just a heavier dose of the same bad medicine economic witch doctors have been prescribing for years.One of their latest gimmicks, however, is beyond absurd. And the scariest part is that it’s gaining ground.This dangerous gimmick is something called a “universal basic income”—or UBI, for short.It’s where the government gives you money, just because. There’s no requirement to work or even display a willingness to work. You could sit at home all day, watch TV, and still get a check from the government.Remember, even people living under communist regimes have to work. But with a universal basic income, the government simply hands out “free” money to everyone for doing absolutely nothing.Let that sink in for a minute.I think a universal basic income will become a pressing political issue in the near future. It’s becoming more popular in so-called academia. The political elite and Silicon Valley bigwigs are also embracing it.Bernie Sanders and a number of prominent Democrats support a UBI. So does Facebook founder Mark Zuckerberg.I expect more and more misguided Americans to accept a UBI as status-quo politicians, economists, and media talking heads support it… and as inflation pushes up the cost of living and more people feel the pinch.The idea will be politically popular. Who would protest free money?If the US adopts a UBI, it would be next to impossible to get rid of. Who would vote for a politician that stops the gravy train... or even one that slows it down?The problem is… nothing in life is free. Expect more money-printing to pay for these policies. That, in turn, will create more inflation.I think anyone who’s serious about protecting their wealth in this dangerous environment should own some physical gold.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.